State Housing Market Continues on Record Pace, Says UA’s Real Estate Research and Education Center

TUSCALOOSA, Ala. – Existing home sales in Alabama set a new record yet again in May with 5,442 homes sold in one month, according to the Alabama Real Estate Research and Education Center at The University of Alabama.

“Despite predictions of a slowdown by some analysts, nothing seems to stop this market,” said Dr. Leonard Zumpano, director of the center. Zumpano said the May increase in sales represents a 14 percent jump over the previous month’s pace and is a full 23 percent higher than the same time last year. Average selling price was also up strongly at $130,946, 5.2 percent higher than April’s figure. The average days on market fell 8 days to 141 while supply of available used homes fell to a very tight 4.7 months.

Year-to-date home sales are up 22.3 percent compared to last year while average selling price is virtually unchanged, the center reported. “To appreciate the magnitude of these changes it should be noted that 2003 was a record setting year for home sales,” Zumpano said. “This has been truly an incredibly strong housing market through the first five months of the year.”

Existing home sales in May rose in all but two of the locations tracked by the Center, falling in Selma and Cullman. Year to date sales, however, are up in all reporting areas.

“The accelerating pace of home sales is likely a response, at least in part, to consumer expectations of rising interest rates, a phenomenon we began to see in April’s data,” Zumpano said. “Many potential home buyers who had been sitting on the fence or trying to time the market to get the lowest possible interest rate were probably motivated to lock in their loan rate once mortgage rates began to rise last month. The average effective rate rose from 5.43 percent in April to 5.77 percent in May, with 30-year fixed rates slightly above 6 percent.”

Existing home sales nearly set a record at the national level as well. Home sales hit 6.8 million units on an annualized, seasonally adjusted basis, according to the National Association of REALTORS®. This represents the second highest level on record and is up 2.6 percent from the previous month. The median sales price was up 3.4 percent to $183,600. Supply remained very tight at 4.2 months at the current sales pace. Compared to May of last year home sales are up 15.8 percent and the median sales price is up 10.3 percent.

New home sales also surged to an all time high in May, increasing 15 percent to 1.37 million units. As a result of the increased sales pace, the supply of new homes fell to 3.3 months. Housing starts, typically a leading indicator for new home sales, were essentially unchanged in May, falling less than one percent to 1.97 million units. Total residential construction spending was up 1.3 percent in April, according to the Commerce Department. “The fact that builders have kept up the strong pace of home building in the face of increasing interest rates speaks to their confidence that they will continue to sell homes at a strong pace over the near term,” Zumpano said.

The national employment situation continued to improve in May adding 248,000 new payroll jobs while the unemployment rate remained unchanged at 5.6 percent. The employment numbers for two months were also revised upward by a combined total of 90,000 new jobs. The Consumer Confidence Index increased in May to 93.2 after remaining unchanged from the previous month. This is likely the result of all of the positive economic news in the last few months, most notably in the employment sector, according to Zumpano.

The Consumer Price Index (CPI) jumped up again in May 0.6 percent. The core index, however, which excludes volatile food and energy prices, was up only 0.2 percent for the month, increasing by 1.8 percent over the past 12 months. The Producer Price Index (PPI), considered a leading indicator for the CPI, also rose sharply in May with a 0.8 percent increase. The increases in both the CPI and the PPI are due to a sharp rise in fuel prices. Increases in health and medical related costs also contributed to increases in the indices. Fuel costs have been declining in June and this should be reflected in both the CPI and PPI over the next couple of months.

“The incredible performance of the housing market is a function of many factors, not the least of which include a healthy employment situation and mortgage rates that are still extraordinarily low from an historical perspective,” Zumpano said. “The tight supply of housing also contributed to housing price appreciation.”

As expected the Federal Reserve raised its target for the federal funds rate by a quarter of one percent recently and is signaling a tightening credit situation in the near term, Zumpano noted. “Although housing activity may slow during the second half of the year the recovering economy and the attendant increase in employment will offset most of the negative effects of small increases in interest rates. We anticipate these effects will be minimal, showing up mostly as a slow down in price appreciation as some homebuyers get priced out of the market,” Zumpano said.

The Alabama Real Estate Research and Education Center is part of The University of Alabama’s Culverhouse College of Commerce and Business Administration. The UA business school, founded in 1919, has been recognized repeatedly for offering a high-quality, cost-effective education.